Near Prime Or Sub-Prime Borrowing

Have you stopped to think about whether you really need a bad credit mortgage, remortgage, credit card builder or any other financial product designed for people with a real adverse credit history?

The PwC estimate the market size of the Near Prime credit sector to be between 10 million and 14 million people.

What does Near Prime mean?

It’s on the edge of becoming considered as having bad credit, but not quite that you do. When your credit files show mild negative entries like a single missed payment over two years ago, or you haven’t updated your address resulting in inconsistencies, you could be automatically classed as a higher risk by mainstream lenders using automatic review processes that reject your applications based on even the slightest of negative entries on your credit reports.

This report by New Day digging deep into the Near Prime credit sector reveals that the majority of people are unaware that because they’re being considered as a Near Prime consumer, they’re paying more for energy services, broadband bills and even the mobile phone tariff your provider offers you costs more because you’re not quite the right fit for them. They’d rather see some slight improvements to your credit files in order to give you the same services for less.

This report in 2014 pointed out “the annual cost of having a poor credit score for a middle income household was £1,770”.

It begs the question…

Do you have bad credit?

If you really need finance from an adverse credit specialist lender your credit reports should read rather badly. Like you take a look at it and think, what was I thinking? A £10,000 secured loan left to go into default while I kept the payments up on the TV subscription service? Ouch, a CCJ… or worse – when’s that bankruptcy entry going to drop from this?

Those are examples of an adverse credit history that would require a specialist bad credit provider for any credit application.

Near Prime borrowers don’t have any severe entries on their credit file. It is minor issues such as address inconsistencies, one payment missed over three years ago, and sometimes there’s even no missed payments in the past few years but your credit is still considered subpar because it might be thinner than what’s considered normal. There’s just something either there or not there that’s worrying lenders.

When you turn the age of 18 years old, your credit file begins from scratch. With zero credit history, you don’t have anything to show you’re neither a good nor a bad borrower, so instead you’re in the middle ground. Large banks and building societies edge on the side of caution and reject applicants with thin credit files. On the other side of the coin, the adverse credit finance products come at a higher cost because you’re considered to be a higher risk, and that’s often due to those earlier rejections.

The only way around that is to access your credit reports to find out if you are in the Near Prime category, or if you really do need finance from an adverse credit specialist lender.

How to know if you’re a Near Prime Borrower

The PWC break down the near prime market into three categories:

Existing borrowers paying interest rates above 29.9% on credit cards and other loans. If you’re paying in the region of 29.9% to 39.9% for a credit card interest rate, or other type of finance, you’re a Near Prime borrower.

Borrowers with characteristics of a Near Prime borrower. This category is representative of millions and it’s only because of a small amount of missed payments (often fewer than two), inaccurate or inconsistent address details on your credit report, or just having a thin credit file in general, perhaps never having obtained any credit in the past.

The borrower who perceives themselves to be Near Prime, without actually knowing. The findings in the report published by New Day showed that 38% of near prime borrowers believed that if they only missed one single payment, they had bad credit and therefore couldn’t ever approach a mainstream lender again for any finance. This isn’t the case as things drop off and you can correct inaccuracies and work to improve your credit score, or you might find there’s no issue at all.

If you fall within the first two categories, you’re a Near Prime borrower and not quite in the ball park of having a poor credit score. Your credit score is fair, or fair to good but just short of good.

In that situation, you’re going to find that mainstream lenders may reject your applications. If that has happened, hold off applying for any other loan for six months to let your credit files remain inactive for a bit, then approach things asking for a soft check on your credit file before applying for finance.

In the event that you are going to need a specialist lender for any sort of large finance, it is advised that you ask for advice from an independent broker or advisor so you can explain that you don’t have bad credit entries, but you do have an issue (or a few) with your credit files as despite being good with your finances, your credit files don’t reflect that.

Advisors are aware that everyone’s situation is different. You may be a high-risk borrower or you may be down on your luck that it looks that way on your files but in reality, there’s nothing wrong.

Specialist lenders don’t just cater to people with bad credit. Personal circumstances are taken into account and reflected in any provisional offers. Just because you had a rejection once, doesn’t equate to you having a bad credit history. It’s just considered that it’s not quite the right fit for the majority of lenders and requires a tailored approach when arranging any secured finance.